The Delhi High Court ruled that compensation received for non-carrying of business is capital in nature after considering the operation of non- compete agreement for 10 years.
The assessee, M/s Saeed Mustafa Shervani in his individual capacity filed his Return of Income (ROI). In the ROI, the assessee declared his income as Rs.23,24,590/-. An intimation with regard to ROI was served on the petitioner under Section 143 (1) of the Income Tax Act, 1961. The record disclosed that the assessee was served with a notice for assessment and consequently an order was passed under Section 143(3) read with Section 147 of the Income Tax Act.
Via the aforementioned order, the Assessing Officer (AO) concluded that Rs.8 crore received by the assessee from an entity going by the name, Wilkinson Swords India Ltd [“WSIL”] under a noncompete agreement was taxable as revenue receipt. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [“CIT(A)”].
The CIT(A), sustained the assessment order. It is in this background that the respondent/assessee approached the Tribunal. Before the Tribunal, the issues with regard to the jurisdiction to trigger reassessment proceedings under Section 147 of the Income Tax Act as well as on merits were raised.
A non-compete agreement was executed between WSIL and GISL. Via this agreement, GISL agreed not to engage or participate directly or indirectly in any business in India or any other country in the world which involved manufacturing, trading, selling, marketing and distribution of the products or any components thereof or providing any services in connection therewith for a specified period, which was 10 years. The only exception which was provided was in Clause 5 of the said agreement whereby GISL could manufacture and supply the products referred to in the agreement to WSIL.
Prashant Meharchandani, senior standing counsel, who appeared on behalf of the appellant/revenue, relies upon the view of the AO in support of his argument and submitted that the entire agreement was a charade. According to him, the compensation for the purchase of two units of GISL located in Mysore was artificially configured to include the compensation for non-compete agreements which was paid to the two individuals referred to hereinabove, i.e., the assessee and Mr S.I. Shervani.
A Division Bench comprising Justices Rajiv Shakdher and Girish Kathpalia observed that “Clearly, for the period in which the non-compete agreement was to operate, which in this case was 10 years, the assessee’s source of income had been clamped and, therefore, compensation received by him could only be treated as capital receipt. Thus, we have no difficulty in holding that the conclusion arrived at by the Tribunal was correct.”
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